Shaw slides on news of SEC probe

NEW YORK (CBS.MW) -- Shaw Group shares slumped Monday as news of an informal regulatory probe at the company added to existing concerns about earnings and cash flow.

The Baton Rouge, La.-based provider of general engineering services said last Thursday that the Securities and Exchange Commission had informed it June 1 of an informal investigation.

The company said the SEC had declined to specify the reason for the probe, although it appeared to be related mainly to the purchase method of accounting for acquisitions, as presented in Shaw's 10-K annual report for fiscal 2003.

Shaw's
SGR, +4.78%
chief financial officer, Robert Belk, said the company is confident its accounting is fully compliant with generally accepted accounting principles and pledged to cooperate fully with the authorities.

But the company's shares took a sharp hit on the news when the market opened after the long weekend, trading last down more than 12 percent at $10.75. Volume of 2.6 million shares traded was almost four times the stock's average full-day volume.

Analyst Neal McAtee at Morgan Keegan said one issue in recent years has been Shaw's use of profit normalization in the purchase of companies whose margins lag the broader industry. However, this practice is allowed under GAAP, he said.

"We have been well aware of the practice from the beginning and as a result have focused primarily on the cash-flow trends of the company," he told clients in a note.

While the inquiry could yet develop into a more formal investigation, McAtee is confident that Shaw has not breached any accounting rules in its treatment of acquisitions, he said.

Any adjustments, he said, would likely focus on the goodwill portion of acquisitions accounting and would mainly be noncash in nature.

Shaw's 2003 annual report included five acquisitions, the largest of which were the May 2002 purchase of the diversified engineering and construction-services company IT Group for $105 million and the July 2000 deal to buy Stone & Webster for about $142.6 million.

The company also bought environmental company Envirogen for $3.6 million in March 2003 and Badger Technologies, a provider of petrochemical and petroleum refining technologies, for $17.7 million, in April of the same year.

It also purchased gas drilling company LFG&E International in November 2002.

Merrill Lynch analyst Lorraine Maikis said she's sticking to her "neutral" rating on the stock. In a note to clients, she highlighted earnings weakness at the company, which has lowered estimates in each of the past four quarters.

In April, Shaw reported second-quarter earnings of $2.2 million, or 4 cents a share, swinging back from a loss of $7.9 million, or 21 cents a share, a year earlier.

"Although we believe that the worst is over, risks remain surrounding the profitability and cash-flow-generating potential of the company," said Maikis. "We expect that this investigation will create an overhang on the stock in the near term."

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